DRIVERS OF INFLATION #9: EXCESSIVE MONEY SUPPLY GROWTH
Economists can not agree on what causes inflation, so we are writing a series of the ten drivers of inflation. Many people want to focus on rising food and oil prices as the reasons for the current inflation, and that inflation will go away if we get some relief in food and energy prices. We maintain that many of the drivers of inflation are pointing in the direction of higher inflation…for a longer period of time.
The ninth driver causing this current inflation is that money supply growth is excessive in many countries.
a) A popular school of economic thought holds that the rate of growth of the money supply in an economy minus the rate of growth of productivity in the same economy will equal the potential inflation rate a year later.
b) To say it another way, if money supply growth is 10% and productivity growth is 2%, then within nine to eighteen months, inflation will be about 8%.
c) We have mentioned before that there are dozens of countries around the world with money supply growth rates over 10%, and a few with money supply growth rates over 20%. While productivity growth may be 4% in a few countries, it is generally about 2 or 3%.
d) Inflation rates are already leaping ahead in many countries. We have a global economy that is interconnected and has many feedback loops. Inflation in one part of the world feeds into other parts of the world through trade, payments, investment, and speculation.
Rapid global monetary growth, in excess of productivity growth, is leading to multiple breakouts of inflation worldwide. These inflation breakouts are stimulating and reinforcing inflation among their trading partners.
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